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Cash and Risk Visibility Top Treasury Concerns: Survey

Visibility into cash and financial risk exposures continues to be one of the biggest challenges for corporate treasury organizations, despite ongoing efforts by multinational companies to improve transparency and enhance internal cash balances, according to the Deloitte Treasury Strategy and Operations Survey of more than 300 treasury professionals. The survey, conducted by Deloitte & Touche LLP, in cooperation with gtnews, gathered opinions on top treasury goals, mandates, pain points, strategies and technology approaches.

Thirty-six percent of respondents described cash and financial risk exposure transparency as their largest pain point. “Historically, the visibility over cash was closely related to bank balance reporting,” says Scott Gauch, a principal at Deloitte & Touche LLP. “However, the definition has widened to include visibility over projected cash inflows and outflows globally and associated FX risk exposures faced by the companies.”

Without clear visibility into cash balances, forecasting becomes a major challenge, although there are other factors that play a part. “Carefully forecasting material cash inflows and outflows in the transaction currency at the business unit and consolidated levels may be more difficult due to disparate ERP systems and coordination required across multiple layers in the organization,” Mr. Gauch notes.

Twenty-nine percent of the survey respondents indicated inadequate infrastructure for treasury systems as the second-biggest pain point issue. “Many large corporate treasury functions continue to rely on spreadsheets and standalone online banking systems,” explains Carina Ruiz, a partner with Deloitte & Touche LLP. “This may lead to inefficient and siloed processes with multiple touchpoints.”

Treasury Organization Models

The corporate treasury professionals who participated in the survey were asked about their use of five treasury organization models—center of excellence (COE)/in-house bank (IHB), shared service center (SSC), corporate treasury, decentralized and outsourced—and the advantages and disadvantages of each.

Based on the survey results, entities with revenues of up to $5 billion primarily use corporate and in-country treasury organization models for execution of treasury responsibilities.

Use of COEs/IHBs and SSCs by entities in the $5 billion and below revenue range is limited. One reason is that transaction volume may be too low to justify the investment required to set up these structures and to implement the supporting technology. Rather, these entities tend to leverage outsourcing more often than COEs/IHBs and SSCs due to limited implementation effort and cost, and no technology investment required by the outsourcing structure.

As companies grow, they tend to implement COEs/IHBs and SSCs to generate cost savings from transaction processing. Consequently, the volume of treasury activities performed by the corporate and in-country treasuries decreases. Entities with revenues exceeding $20 billion appear to leverage IHBs and SSCs as heavily as they do in-country treasury operations.

Benefits of Centers of Excellence/In-House Banks

According to survey respondents, the primary advantages of COEs/IHBs are centralized liquidity management, reduced external transaction costs and development of internal knowledge. The treasury activities primarily supported by COEs/IHBs include cash, FX and bank relationship management, as well as cash reconciliation.

“Establishment of COEs/IHBs requires an investment in technology to support the new structure,” says Ms. Ruiz. “As a result, COEs/IHBs are frequently established by the large international organizations with high external transaction volumes and annual revenues in excess of $5 billion.”

Considering the five options provided in the survey, respondents rated COEs/IHBs second after corporate treasury as the preferred organizational model for execution of treasury responsibilities. As expected, the responsibilities that are effectively managed by COEs/IHBs include cash, FX, and short-term investments and debt management.

Centralization through COEs/IHBs typically allows entities to focus on value-adding treasury activities, while the transaction-processing activities are either automated through the treasury technology or performed by the SSCs, if used.

Benefits of Shared Service Centers

Survey respondents indicated that the primary advantages of using SSCs are the cost savings and the standardization of treasury processes. Typically, SSCs consolidate and perform transaction processing activities that previously were performed by subsidiaries before an SSC’s establishment.

Treasury activities that may be frequently supported by SSCs include cash reconciliations, treasury IT, accounting and cash management. Establishment of SSCs often requires less investment in technology to support the new structure than does establishment of an in-house bank. Also, SSCs are often implemented along with broader finance, thus the cost of implementing is shared across multiple functions. In-house banks are often implemented solely by the treasury group.

As a result, the SSCs are most likely to be established by large international organizations with annual revenues in excess of $5 billion. The majority of the survey respondents that implemented COE/IHB structures also leveraged SSCs for processing of treasury transactions.

“Of the options provided in the survey, SSCs were viewed by respondents as one of the least-preferred organization models for executing specialized treasury activities,” says Ms. Ruiz. “Compared with other treasury organization models, the SSC is viewed as the least suited for capital markets activities such as debt management, foreign exchange, interest rate risk, commodity risk, investments, retirement plans and broader banking relationships—which are better managed by specialized treasury resources.”

Similar to other centralized organization models, companies that leverage SSCs for treasury support often experience limited control over transaction processing at the SSC.

To help achieve a smooth SSC implementation and avoid post-implementation pain points, Ms. Ruiz suggests that companies consider establishing strong protocols with the team responsible for the relevant SSC and creating open lines of communication for continuous improvement. Availability of the skilled treasury resources should be investigated along with the feasibility of executing treasury processing in the SSC jurisdiction.

Similar to COE/IHB implementations, companies embarking on an SSC initiative should work closely with the other departments to realign processes to fit the new model. “Treasury should work with the business units that may be affected by the new model, and equally important, with units that may resist adoption of the new model, processes and tools,” Ms. Ruiz adds.

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Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.

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